Title insurance protects against losses related to the title and transfer of title of real property. Title insurance further protects against losses from the invalidity or unenforceability of mortgage liens against the real property. Title insurance may be employed and/or utilized as a potential defense against a lawsuit or allegations directed to the validity of the title associated with the real property. Typically the real property interests insured via a title insurance policy are fee simple ownership interests or a mortgage interest associated with the purchase of the real property.
Title insurance may be generally categorized as (a) owner's policies and (b) lender's policies. Owner's policies generally insure an owner of a real property that the title to the property is free from all defects, liens and encumbrances. Owner's policies may cover losses and damages suffered, often up to the purchase price of the property, if the title is unmarketable or otherwise proves to be defective. Lender's policies insure a mortgage lender and benefit the purchaser of the mortgage loan if the loan is sold and/or resold. Lender's policies facilitate the sale of mortgages into a secondary market.
Title companies, i.e., companies that specialize in issuing owner's policies and lender's policies, are required to maintain a monetary reserve to protect against policy claims. The larger the required monetary reserve, i.e., the larger the number of outstanding owner's policies and/or lender's policies, the less money the title companies have to invest and the less money that is available to provide new policies. Title companies use an actuarial method to estimate the amount that they need to set aside in reserve. Due to the volatility of this estimate, which potentially can be either too high or too low, the title companies are exposed to greater liability and, therefore, increases the likelihood that the title companies are not maximizing their financial reserves.